It’s 12 after seven, the Treasurer, Peter Costello is on the line in our studio in Canberra. Treasurer, good morning.

Good morning to you Alan.

Nice to talk to you. Congratulations on the Budget and this attack on debt, I suppose when you began the attack you were never to know that Asian economies were to collapse because of debt?

No we didn’t know, and I’ve been very open about this, two years ago we didn‘t think that Asia, which had been the fastest growing region in the world for about two decades, would go through a financial collapse of this order. But we did know two years ago if we didn’t start strengthening the Australian economy then adverse events beyond our control could have a very bad effect. And that’s why we’ve started strengthening the Australian economy two years ago. And it doesn’t bear thinking about really, what would have happened if we hadn’t. If we’d continued as the Labor plan was to run $10,000 million deficits year after year…

And that is the Asian problem, isn’t it, that growth was based on massive public and private debt?

Well there’s a whole range of things that went wrong in Asia. One, is that they pumped up growth rates on an unsustainable basis, as you say. The other is that their financial systems were weak, the other is, you have probably heard that expression “crony” capitalism…..

Corruption?

A lot of lending was going out to associated companies and they weren’t actually supervising the business environment properly.

Do you think we still have a problem, though, and obviously you’re not going to solve the problems in a couple of years, do we still have a problem in this country built into the Budget where we do talk about economic growth and growth rates but not enough of it is built on production, too much of it is built on what I call social spending; health, education and welfare?

Look we’ve tried to do as best we possibly could over the last two years to get spending in those areas under control. You probably know that Jocelyn Newman, the Social Security Minister, started enforcing social security law and asked people to repay entitlements that they weren’t entitled to and recovered monies where they had actually claimed money and they weren’t entitled to it and saved $28 million a week.

It’s amazing isn’t it, it’s just frightening.

$28 million a week. It could have been done any year in the last 13 years.

I mean when you say that people say I’m sure he meant $28,000.

No, no, no $28 million.

I know.

The thing about Australia, you know, is, there are 18 million people in this country, now that was more than a dollar a head per week. $28 million per week was saved just by following up leads and asking money to repay entitlements. Now, you know what gets me about that, Alan, what that means is for the previous 13 years, under Keating and Beazley, for the previous 13 years you were losing $28 million a week to people who weren’t entitled to it.

They are the only ones that you unearthed, there’s obviously more than that out there that still has got to be found out.

Well I think that’s right. You know, the more you talk to people, the more people will say to you, and I think they’re right, look they say I don’t mind paying my fair share of tax but just please make sure you don’t waste it.

Well on that, you just said we’ve done our best in the brief time we’ve been there to reduce spending on, what I call non-productive areas, health, education and welfare. And then you argued, I think about ten days ago, that the health system’s got to be over hauled. Aren’t there too many Peter Costellos and Alan Jones’ going into doctors surgeries and public hospitals every day for nothing.

Well I think this is one of the problems. We have said to people you can have medical care for free, right. Now you and I know that you don’t get medical care for free. You’ve got got a highly trained doctor, you wouldn’t go and see an accountant for free, or a lawyer for free or anybody else for free….highly trained doctor he is charging for his services, he or she, and at the moment they’re charging the taxpayer. Now what we’ve got to do is, we’ve got to encourage those people who have the ability to pay to start making a contribution, and one of the ways in which we want to encourage them to do that is to take out private health insurance. You remember….

But your parents had private health insurance and their premium was tax deductible, we paid for it then, it was a cost, but the benefit was far greater than the cost. Old fashioned system, what’s wrong with it?

Well what’s happened with the system of private health insurance is that as you started giving out free services to my parents, you, me, everybody, people said well, why should I take out health insurance.

Of course they did.

Because you can get it for free at the doctors or in the hospitals. So what then started happening is that people started dropping out and higher risks stayed in, so the premiums went up, so people started dropping out, so the higher risk stayed in, so people dropped out. And it became a vicious cycle. Now we’ve got to turn that cycle around. One of the things that …

Which means you’ve got to attack Medicare which no-one’s been prepared to do. The system surely is quite fraudulent, inconsistent with what you’re saying about cutting back eligibility for things which you shouldn’t be entitled to because you can afford them yourself.

Well look everybody agrees you’ve got to have a good public hospital system so that people who can’t afford medical care get it.

For those in genuine need.

But for those that can afford to make a contribution they should be making a contribution through private health insurance. And we’ve got to make the private health insurance product better by alleviating costs. The first thing we did was we introduced some rebates, but also by giving some bonuses I think. One of the things about private health insurance, let me compare it with motor car insurance…..

The healthier you are, of course means nothing.

Well that’s right, you and I know that if you don’t have an accident this year, you’ll get a bonus on your premium

You’ll get a rebate.

….and so you think to yourself well I’ll have a good driving record and all of that. Now in health insurance, as you know, that means nothing and so that is one of the problems with the way in which it works, which the Health Minister I think mentioned yesterday, he’s looking at.

Okay, know there’s a lot been talked about a GST, okay. And I read where you had said a new indirect tax will replace a number of existing, and I’ve been through various things that you’ve said and amongst the things that we are going to replace because the system’s too unweildy and confusing, and you said exemptions will be minimal, but personal income tax as a commitment in general terms to be reduced for people on all incomes, marginal tax rates will fall, the tax free threshold will be raised, further tax reductions offered to families, business taxation shaken up, talk about a guaranteed share of income tax to the States. How do you do all of this on a GST of 10 per cent?

Well what a broad based indirect tax or a GST can do is, it can replace your current indirect taxes. That is the main thing, you realise at the moment…

It can if it’s high enough.

Well you realise at the moment that we have a whole range of indirect taxes.

All my listeners know that. All my listeners know from the moment you shower in the morning and get out of your pyjamas and pull the blanket back until you get in your car, everything is being taxed, they all know that.

Well I don’t know if you saw it, there was a program on 4 Corners earlier in the week and they had a small businessman in Newcastle and he brought out a sheet of metal and he said, if I buy that sheet of metal flat, there’s no wholesale sales tax, but the moment somebody bends it, it is a taxable product. Did you see that?

I didn’t but it’s absurd.

It was the same piece of metal, it was about six inches by nine inches and somebody bent it and it became taxable.

Now the blanket and the soap and the orange juice and the car and the tyres and the brief case and the doggy bag and the bin are all taxed, they know that.

They are all taxed. And the thing is that some of them are taxed at 12, some are taxed at 22, some are taxed at 32…

But are you certain with the homework that you’ve done that whatever you pitch the GST at, you’ll be able to eliminate those indirect taxes and at the same time provide income tax relief.

Well the whole idea, firstly, on indirect tax, the whole idea is to say look we’ve got indirect taxes, instead of having clumps of groups with stupid rules that accountants and lawyers and courts and tax commissioners spend their whole lives trying to work out, why don’t we have just one rate across the board. Even, fair, sure. Everybody knows what it is, okay. We don’t have these stupid little rules where: is that – we have courts of law, Alan, sit around and say, what’s a bend in a piece of sheet metal, because if it is bent….. In addition to that if we rationalise our indirect tax system, we should go a step further and start rationalising the personal income tax.

Right. All I’m saying is can you afford all that? Supposing you take the top marginal rate down from 47 to 40 and supposing you then reduce every other rate, the lowest rate from 20 to 15, the 34 per cent down to 30 per cent and the 43 per cent down to 35 or 36 and you cut out the wholesale sales taxes, can you strike a GST rate which will pay for all of that?

Oh, you can.

How high?

It’s just a matter of mathematics.

How high?

But I know you’re going to now ask me what are all the rates.

Well no I don’t expect you to do that because that would be wrong, you’ve got to do that in your statement …

But the trouble is, what you do is, you can sit down and you do your sums and we are doing our sums. What we do is this. Let me explain it to people. We say: what do we want from a tax system? Well we want enough money to run the schools and hospitals and roads that people want, and no more. Secondly, how do you want to raise your taxes? Well, why don’t we raise them in the most simple way so that everybody knows what it is and everybody pays what they’re obliged to and no more. Thirdly, why have this complicated indirect tax system? Just let’s make it universal, low rate. Fourthly, why tax middle income earners 43 cents in the dollar on their income? You know, the average income earner, pretty shortly, is going to be paying 43 cents, plus the Medicare levy.

Yes well our problem is we tax income, savings and profits

Right.

And we should be taxing expenditure.

Well, exactly right. So we’re saying to the whole public we want you to work hard and save so everytime you go and work we’ll take half your money from you.

But what I was just saying to you is that see, where you’ve got the problem in the electorate is they say hang on, well when the UK introduced what you’re talking about in 1973 they struck it at seven and a half per cent, it’s now 17 per cent. How do they know this is not just going to escalate to pay for increased government spending?

Well because once they know the rate, the people of Australia can police it. You see, let me ask you this question. How do they know the wholesale sales tax rates won’t increase?

Well that’s all been legislated for and it happens every year behind your back and you don’t quite know it’s going on.

Well precisely right. Do you know, after the 1993 election, after Paul Keating and Labor defeated John Hewson’s Fightback saying that they didn’t want GST, do you know what happened after that election? The wholesale sales tax rate which was 10 per cent went to 12 per cent. And the wholesale sales tax rate which was 20 per cent went to 22 and the wholesale sales tax rate which was 30 went to 32.

And people in their daily lives are not aware of that.

And people in their daily lives are not aware of it and they thought, oh, we were voting against indirect taxes and you know what they got, they got indirect tax rises. And I tell you, the people that are running around and saying to you now, oh, well we don’t need one single rate that the public knows about, secretly harbour the desire to do it again. And the 12 will go to 13 and the 22 will go to 23.

Well let me just take that on board, your point about a simple tax. You say … it’s got to be transparent. See there is such a tax, and this is where I have a bit of a difficulty with you because it’s called a debits tax and when you were in Opposition you wrote to the Vice Chairman of the Debit Tax Council and said the Coalition believes the current tax system is stifling individual incentive and opportunity. Your proposal for a debit tax system is certainly novel and creative however I suspect that it’s perhaps just a little too radical to convince the community of the merits of such a proposal. Now here’s a tax which would involve paying no tax on your income, no sales tax, no tax on savings, no tax cheating, no tax avoidance, no deeming, no tax returns, no tax file numbers, but you’ve told Treasury, I understand, that this shouldn’t form part of any kind of discussion about tax reform. Why?

Well, quite the contrary, I’ve had it looked at and I’m afraid like a lot of these things, superficially attractive but actually would be quite disastrous.

Well is there a paper on this that someone like me can read.

Well I can send you one but let me make you a couple of points. The first thing I’ve realised is that bank account debits tax is probably the most unpopular kind of tax you can possibly have. We’ve got one you know.

Yes, but that along with a million others.

Well, yes, but I get more letters on this than anybody. All of the pensioners out there when they get their monthly cheques …

Ah, but hang on pensioners would be exempted from this.

Oh no they wouldn’t. No, no, no.

Well they should be.

Well that’s not the proposal of the bank account Debits Tax Council. It’s to make everybody pay it, including pensioners, who have to sit down at the end of the month, they don’t know what’s in their cheque book and they have to work out how much was taken out in tax. Now the second point is, and I’ll send you the paper because I’ve looked at it you know what the increase in bank accounts debits tax would be under this proposal.

The what.

The increase in the current tax would be.

Well I don’t know about the increase in the current tax. We would be eliminating all taxes.

No, the increase in the current bank accounts debits tax that they’re proposing.

Well the debits tax would be eliminated and replaced by one tax.

No, no.

But accounts held by pensioners and unemployed people and benevolent institutions like charitable welfare bodies they would be exempt from this tax.

Yeah….

There’d be one struck tax on all withdrawals from banks and credit unions and superannuation funds and annuities and all those things. One level of tax.

Yes, but do you know what the rate is. It’s 80 times the current rate.

Yes but hang on, hang on, hang on. That’s not a valid argument. We’re saying if a GST is going to come in at 10 per cent or 12 per cent, that will be as well as corporate tax, as well as income tax, as well as your tax file return, as well as everything else. We’re saying strike one single tax, no tax return, no company tax, no tax on savings, no nothing, and I guarantee a tax rate of less than 15% will provide you with enough income to recover the revenue you need and pay off your debt.

I’ll send you a paper on it because I have actually looked at their proposal. Their proposal is to take the current …

I’d love to see the paper.

To take the current bank accounts debits tax and increase it by 80 times.

No, no, no, well hang on.

That’s the rate.

I can tell you. I just wish we’d had a debate and that these things could have been incorporated. See …

Oh, well they’re looked at all the time. I mean I’ve looked at this very carefully and one of the things why I looked at it is I thought to myself, if this is a good idea why is no country in the world doing it?

Well the United States are spending a lot of work on it.

No, there’s no country in the world that does it.

There are a lot of background papers in America in the Clinton Administration who faced the awful problem with tax whereby the tax couldn’t even pay the interest on their debt so they had to recast the whole tax system. See on that, can I just, because time is against us, foreign ownership has escalated in the last 40 years. Now, you’ve got people out there saying foreign corporations have tax holidays not available to Australian companies. This was done long ago to encourage foreign investment. Why did Treasury, way back in ‘86, tell the Australian Bureau of Statistics to stop the publication of foreign ownership figures in market segments. We don’t know how much foreign ownership there is in this country. You can’t tell me now.

Yes, we publish an annual report by the Foreign Investment Review Board…..

In real estate, farms?

….Yes…..

No you can’t.

Yes, it does. It tells you the amount and the number of applications. It’s an annual report, I’ll send you one.

Peter, you can’t tell me the level of foreign ownership in farms, in manufacturing, in real estate. You can’t. Treasury stopped them.

No, no. We publish an annual report of the Foreign Investment Review Board which tells you the number of applications, the number that have been granted and the amounts.

But the aggregate of foreign ownership we do not know. Now some people say that $80 to $100 billion leaves Australia every year tax free. Are we going to get the tax on that, that the Japs get? Japs tax that at 52 per cent.

Well let me make this clear, foreign companies in Australia pay the same tax rate as Australian companies and I have taken every action that is available to make sure …

As long as their profits stay here.

Well, even if they don’t, we tax them before they leave with a withholding tax. And let me make this entirely clear, this Government is making sure that we get full tax dollar out of foreign corporations. Now, we introduced rules called thin capitalisation rules for precisely this purpose. We’re introducing rules against transfer pricing for precisely this purpose. We introduced rules on foreign investment funds for precisely this purpose. Have no doubt about this..…

Peter, is there an Income Tax International Agreements Act, which there is, I’m asking you a question to which I know the answer of 1953, where the tax on profit made by foreign owned companies in Australia is paid outside this country and so Australian companies increasingly move offshore, taking with them their profits and they avoid paying the tax in Australia.

No, if any company derives income in Australia, that is taxable in Australia, under Australian tax law. If any company derives income in America it is taxable under American law. If an Australian company, let’s say BHP, is running a business in the United States …

Can I, we have to do these things, whether you’re the Treasurer or not, I have to take commitments to the news. We need to talk again. Can I thank you for your time.

No, it’s been a great pleasure Alan. I must say you almost talked me into that lovely luxurious weekend up in the Blue Mountains, that sounded fantastic.

Thank you for your time. Send me the thing on the debits tax.

Thanks very much.

Peter Costello.